employees' right upon reduction of future benefits (paragraphs 10 to 11 below) and;

successor schemes (paragraphs 12 to 13 below).

Proposal

Treatment of Accrued Rights of " Opted-Out " Members

2. For an existing member who opts to join an MPF scheme, the treatment of his accrued rights under the relevant ORSO registered scheme will depend on whether it is a defined contribution or a defined benefit scheme.

I.Defined Contribution Scheme

3. For a defined contribution scheme, it is proposed that the accrued rights of the members under the scheme should be handled as follows:

the accrued rights should be retained in the relevant ORSO scheme and continue to be credited with investment income until he is entitled to receive the benefits from the scheme; and

when he is entitled to receive the benefits from the scheme, his " total years of scheme service " should be used in determining his benefit entitlements.

4. For example, if an employee has 3 years of pensionable service at the time he opts out of the ORSO scheme and has 5 years of total scheme service at the time he leaves employment, his vesting percentage should be determined based on 5 years rather than 3 years.

II.Defined Benefit Scheme

5. For a defined benefit scheme, it is proposed that the accrued rights of the members under the scheme should be handled as follows:

the accrued rights should be retained in the relevant ORSO scheme until he is entitled to receive the benefits from the scheme; and

when he is entitled to receive the benefits from the scheme, his benefit entitlements, taking into account of his salaries and years of service after he has opted out, should be determined on the following basis:

pensionable service up to the date he elected to opt out;

the relevant benefit factor and/or vesting percentage based on total years of scheme service; and

final average salary determined as at the date of termination.

6. For example, if an employee has 3 years of pensionable service at the time he opts out of the ORSO scheme and has 5 years of total scheme service at the time he leaves employment, his pensionable service under the ORSO scheme should be frozen at 3 years, however, his benefit factor and/or vesting percentage should be determined based on 5 years rather than 3 years. This mechanism has the same effect as calculating his benefits based on total years of scheme service, i.e. 5 years, and then prorate it by the 3 years of pensionable service.

7. Where an MPF exempted ORSO registered scheme provides death, disability or any other benefits in addition to the leaving service and retirement benefits, it is proposed that for an existing employees who opts to join an MPF scheme, his ancillary benefits under the ORSO scheme should be no less than his leaving service benefits determined in accordance with the above opt-out provisions.

8. Annex A sets out some specific examples to illustrate how the proposed mechanism regarding the treatment of accrued rights of the " opted-out " members would work in practice and the consistency in the treatment of Defined Contribution and Defined Benefit Schemes.

Treatment of accrued rights upon dismissal for cause

9. Originally we proposed that existing members of MPF exempted ORSO registered schemes would be grandfathered and would not be subject to any of the MPF rules. However, upon the request of the former LegCo Sub-committee on MPF, we propose to include in the interface arrangements a requirement that, upon dismissal for cause, the employer of the dismissed existing member cannot withhold the employers' funded portion of the existing member's retirement benefits up to the amount equivalent to the minimum MPF benefits. Employers, however, can still have the right to withhold the excess of the employer's funded portion of existing member's retirement benefits over the minimum MPF benefits. We also propose that such minimum MPF benefits can be paid out in cash.

Employees' Right upon Reduction of Future Benefits

10. If a relevant employer decided to reduce any member's future benefit level under an MPF exempted ORSO registered scheme, it is proposed that the relevant member should be given another chance to opt for MPF coverage.

11. For those members who opt for MPF coverage, it is proposed that their accrued rights under the MPF exempted ORSO registered scheme should be treated in the same way as prescribed under " Treatment of accrued rights of " opted-out " members " in paragraphs 2 to 8 above.

Successor Schemes

12. Successor schemes are typically those new ORSO schemes that are established after the transition date, 15 October 1995, due to scheme restructuring or company restructuring where all or a class of members and scheme assets are transferred from one or more existing ORSO schemes to these new schemes. It is proposed that such schemes should be eligible for exemption from MPF requirements.

13. In determining whether a scheme is a successor scheme or not, it is proposed that considerations should be given with regard to the following matters:

the new scheme should be a scheme established as a result of scheme restructuring or genuine business transactions, including company restructuring and joint ventures;

if the new scheme is established after the commencement date of section 7 of the Ordinance, the existing ORSO scheme must be an MPF exempted ORSO scheme;

the terms and conditions of the new scheme should be comparable to the existing scheme; and

a substantial portion of the membership of the new scheme should comprise former members of the existing scheme.

Justification
Treatment of Accrued Rights of " Opted-out " Members

14. The proposed treatment of accrued rights of " opted-out " members mentioned in paragraphs 2 to 8 above is in line with the generally accepted actuarial principles. For a defined benefit scheme, the benefit factor is based on the total service up to the date of cessation of employment while pensionable service is frozen as at the date of opting-out. This method of prorating benefit by pensionable service is cost neutral to employers. Moreover, the proposal implicitly requires the employer to continue to bear the investment risk, or to guarantee investment return to be equal to salary inflation, even after the member had opted out of the ORSO scheme. In this respect, the accrued rights of the " opted-out " members are protected.

Treatment of accrued rights upon dismissal for cause

15. This proposal will ensure that regardless whether an employee is covered under an MPF scheme or an existing ORSO scheme as an existing or new member, his benefits up to an amount equivalent to the minimum MPF benefits will be protected even upon dismissal for cause.

16. The proposal does not require preservation on such amount since it may upset the existing contractual relationship between the employers and the existing employees.

Employees' Right upon Reduction of Future Benefits

17. At the time the option between ORSO scheme and MPF scheme is offered, employees make their choice on the basis of the existing terms and conditions of the two schemes. It is necessary to have some safeguards in place to protect the employees' benefits should such terms and conditions of the ORSO scheme be revised unilaterally by the employer subsequently.

Successor Schemes

18. The proposal prescribed in paragraphs 12 to 13 above are intended to waive the transition date requirement to those new schemes that are established as a result of genuine business transactions or scheme restructuring but not to those schemes that are established to avoid MPF requirements.

Treatment of Accrued Rights of " Opted-Out " Members

The following three examples illustrate how the mechanism would work and the consistency in treatment between defined benefit and defined contribution schemes.

Example I - Defined Contribution Scheme

Contribution Rate :

Employee5%

Employer5%

Vesting Scale :

Years of service

Vesting percentage

less than 3

0%

3

30%

4

40%

:

:

:

:

9

90%

10

100%

Leaving Service = Benefit

Employee Account Balance +

Employer Account Balance x Vesting

Percentage

For an employee who has 3 years of pensionable service at the time he opts out of the ORSO scheme, his account balances are -

Employee Account

Employer Account

as at date of opt-out

HK$ 20,000

HK$ 20,000

His vested benefits as at the opt-out date is:

HK$20,000 + HK$20,000 X 30% = HK$26,000

At the time he leaves employment, he has 5 years of total service and his account balances are -

Employee Account

Employer Account

as at date of opt-out

HK$ 20,000

HK$ 20,000

investment income

HK$4,000

HK$ 4,000

as at date of termination

HK$ 24,000

HK$24,000

His leaving service benefits under the ORSO scheme would be :

HK$24,000 + HK$24,000 x 50% = HK$36,000

Example II - Defined Benefit Scheme

Benefit Formula :

2.0 x Final Month Salary x Pensionable Service x Vesting Percentage

where vesting scale is the same as the one defined under Example I.

For an employee who has 3 years of pensionable service at the time he opts out of the ORSO scheme and his salary at that time is HK$10,000, his vested benefits at the time he opts out is:

2.0 x HK$10,000 x 3 years x 30% = HK$18,000

At the time he leaves employment, he has 5 years of total service and his final month salary at that time is HK$12,000; his leaving service benefits under the ORSO scheme would be :

2.0 x HK$12,000 x 3 years x 50% = HK$36,000

2.The following example is a variation of Example II where benefit factors are defined with respect to years of service. This type of defined benefit scheme is more popular among the large employers and universities. It does not prescribe any explicit vesting scale, however, vesting is implicitly applied through the design of the benefit factors. The benefits described under Example II and III are identical for the first 10 years.

Example III - Defined Benefit Scheme

Benefit Formula :

Benefit Factor x Final Month Salary x Pensionable Service

where

Benefit Factor is defined as follows -

Total Service

Benefit Factor

less than 3 years

0

3

0.6

4

0.8

5

1.0

6

1.2

7

1.4

8

1.6

9

1.8

10

2.0

:

:

:

:

20 or more years

3.0

For an employee who has 3 years of pensionable service at the time he opts out of the ORSO scheme and his salary at that time is HK$10,000, his vested benefits at the time he opts out is:

0.6 x HK$10,000 x 3 years = HK$18,000

At the time he leaves employment, he has 5 years of total service and his final month salary at that time is HK$12,000; his leaving service benefits under the ORSO scheme would be :